banking

Introduction

Due to the coronavirus induced lockdown and the consequent need for more relaxations in compliances, the Central Government, in the absence of regular monsoon session of parliament, has resorted to the promulgation of several ordinances to meet the urgent businesses requirements and changing dynamics of people consumption and savings, the list of ordinances include:

  • Amendments to the Essential Commodities Act, Farmers’ Produce Trade and Commerce (Promotion and Facilitation)
  • Insolvency and Bankruptcy Code (Amendment)
  • Banking Regulation (Amendment) Ordinance, 2020, Act No. 12 of 2020 (hereafter, ‘Ordinance’), etc.

These ordinances aim to meet the exigencies required to meet various business fields, one of them being the banking sector. Prior to the promulgation of the Ordinance on 27th June 2020 w.e.f 29th June 2020, Smt. Nirmala Sitharaman, the current Union Finance Minister, had tabled before the Lok Sabha on 3rd March 2020, the Banking Regulation (Amendment) Bill, 2020 (hereafter, ‘Bill’) which was introduced to further amendment of Banking Regulation Act, 1949 (hereafter, ‘Principal Act’). But, unfortunately, due to subsequent to the coronavirus induced lockdown could not be passed. Therefore in order to achieve the same purpose that the bill sought to achieve a truncated version via ordinance was promulgated.

Objective

The objective and reasons of the Bill were to ‘bring the co-operative banks on par with the developments in the banking sector. It was to be achieved through better management and proper regulation of co-operative banks. The purpose was to ensure that the affairs of the co-operative banks are conducted in a manner that protects the interests of the depositors to strengthen the co-operative banks by increasing professionalism. Thereby, enabling access to capital, improving governance ensuring sound banking through the Reserve Bank of India to enable the making of a scheme of reconstruction or amalgamation of a banking company for protecting the interest of the public, depositors and the banking system and for securing its proper management, even without making an order of moratorium, so as to avoid disruption of the financial system’.

Why the need was felt?

As per the Seventh Schedule of the Indian Constitution, the legislative competency of co-operative banks falls under Entry 32 of List II (State List). While, banking falls under Entries 43 and 45 of Union List, under whom jurisdiction of the regulation of co-operative banks would fall was oftentimes. Thus, the need for bringing the Co-operative Banking society under the purview of the Reserve Bank of India (RBI) was a long overdue. This was propelled by the banking recent scams such as the Punjab and Maharashtra Cooperative (PMC) Bank, Yes Bank, etc.

Recent case

Recently, in the Hon’ble High Court of Delhi in Sandeep Bhalla V. The Reserve Bank of India & Ors, bearing W.P.(C) 2225/2020, which relates with the Yes Bank scam posed a question to the RBI, at the instance of one of the depositors of PMC’s bank, as to ‘What Propelled The Decision To Constitute Reconstruction Scheme For YES Bank And Why The Same Can’t Be Done For PMC Bank’, the hon’ble further observed that ‘Therefore, both the RBI as well as the UOI will file additional affidavits bringing on record the documents, which will establish the reasons which propelled the said decision to be taken i.e. the forging of the Reconstruction Scheme.

The affidavits will delve into the aspect as to how the depositors of PMC Bank are differently circumstanced in comparison to the depositors of Yes Bank.’ Therefore in order to address the said issue and keeping in mind the high Non- Performing Assets (NPAs) of the co-operative banks and for better access to raise capital from the market, the safety of deposits and growing clamor by various banking experts, depositors for stricter supervision of these banks in addition to those prescribed under the State-specific co-operative banking Act the need for the amendment was felt.

Prior to the said ordinance, the co-operative banks were under the supervision and control of the concerned registrar of co-operative society and RBI had a very limited role to play in their supervision which led to the formulation of High Powered Committee on Urban Co-operative Banks under R. Gandhi who has inter-alia recommended in their report for greater involvement of RBI in the management and regulation Urban Co-operative Banks given the huge deposits which are at stake and the wide coverage of co-operative banks in rural areas.

Implications

The ordinance states its objective as to ‘protect the interests of depositors and strengthen cooperative banks by improving governance and oversight by extending powers already available with RBI in respect of other banks to Co-operative Banks as well for sound banking regulation, and by ensuring professionalism and enabling their access to capital.’

The Ordinance would bring as per RBI’s Report on Trend & Progress of the Banking Sector in India dated December 24, 2019, deposits of around Rs. 4,84,316 crore with a total asset base of Rs. 5,99, 214 crores with 1,482 Urban Co-operative Banks and 58 Multi-State Co-operative Banks within the purview of RBI.

The ordinance seeks to amend Section 3, 12, 45, 56 of the Act and has added new section 53A to the Act; it would cover urban, state as well as multi-state co-operative banks, however, it is not applicable to agricultural credit society and co-operative society involved in the business of providing long term finance for agricultural development if it is not banking co-operative.

The following are the significant changes brought by the ordinance viz.

  1. Grants auditing and managerial supervision of co-operative banks to the RBI at par with other commercial banks;
  2. A scheme for revival for reconstruction or amalgamation of a beleaguered Banks could be prepared without an order of moratorium;
  3. Would facilitate the co-operative banks to raise capital from the market through the issue of shares by private placement or public issues or by the issue of secured or unsecured securities. However, it cannot reduce or withdraw its share capital without the permission of the RBI;
  4. Grants RBI the power the suspend the Board of Directors of a multi-state or state cooperative bank and appoint an administrator up to five years under certain conditions such as public interest or to protect the interest of depositors;
  5. The Ordinance has also brought significant changes to section 56 of the principal Act with many subsections either being deleted or modified such as those relating to Restrictions on loans and advances to directors of the bank, change of place of business, etc;
  6. Under the newly added section 53A, the RBI has been empowered to suspend the operation of the Act for a co-operative bank or a class of co-operative banks in relation to qualification and appointment of their directors.

Conclusion

The Ordinance will help instill confidence in all the stakeholders such as the depositors and in the banking system as a whole which off lately has been marred with several big banking scams running into lakhs of crores. These timely measures would lead to greater supervision, transparency, and accountability of the co-operative banks by the RBI and which would in turn promote an efficient and effective banking system.


Author:

ananth kini Ananth Kini | [email protected]

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